MAY 2004

Preemption Battle Continues in Congress

Regular readers of this newsletter are aware that the OCC sparked a firestorm of criticism from state and local regulators when it issued regulations in February that affirmed its sole authority to regulate the lending operations of national banks. Attorneys General in various states denounced the move as stripping state residents of the opportunity for additional consumer protections that they claimed were provided by numerous state and local laws that have been recently passed to curb abusive mortgage lending. Nevertheless, the OCC has been aggressive in asserting it preemptive authority over such state and local laws.

Now the battle has moved to Congress. At a hearing in April, Senator Paul Sarbanes (D-MD), blasted the OCC rules saying they were "at best misguided, and, at worst, a blatant attempt to increase the power of the OCC at the expense of homeowners, the sovereignty of the states and the intent of Congress." On April 7, Senator John Edwards (D-NC) introduced two "disapproval resolutions" that could potentially kill the OCC’s regulations. According to the American Banker, Edwards said that he wanted to prevent the OCC from "gutting North Carolina’s tough law against predatory lending."

The procedure invoked by Sen. Edwards involves the Congressional Review Act of 1996 which gives Congress 60 legislative working days after the receipt of a new regulation to use a process to overturn it. Both the House and Senate deadlines would occur in June of this year. In the Senate, disapproval resolutions like the one introduced by Sen. Edwards can’t be filibustered if they get to the floor. The measure needs only 51 votes for passage. Getting that many votes is a tall order, and the politics do not favor a victory in the House and the Senate, plus a Presidential signature. Nevertheless, the OCC is "concerned that things have gotten to this point," according to OCC chief counsel Julie Williams. The banking trade associations are working aggressively against the disapproval resolutions.

All of this is increasing the pressure for legislation that will set national lending standards for subprime mortgage lending. A number of lending industry trade associations are now aligned in favor of such preemptive legislation, although there is still disagreement over how strong the regulation should be. Notably, the national banks that are already protected from state and local laws by the OCC’s regulation are being less aggressive in pushing for new legislation. This sets up an interesting dynamic in which the industry’s lobbying effort may lack the full impact of some of the most powerful lobbying muscle (i.e., the big banks).